India Faces Potential Oil Shock Amid U.S. Sanctions on Russian Oil

India is now facing the possibility of an oil shock as the U.S. has introduced extensive sanctions on Russia's oil industry. This situation presents significant challenges for India, which has relied heavily on affordable Russian crude oil.

Recent sanctions from the U.S. target not only Russian oil producers but also the operators of ships involved in the transport of this oil. Analysts suggest these measures will complicate India's ability to maintain its imports of cheap Russian crude, potentially leading to increased inflation for the country, which is the third-largest economy in Asia.

Bob McNally, president of Rapidan Energy Group, stated, "India will experience a more considerable impact compared to China, as it imports a significantly higher volume of oil from Russia." The U.S. Treasury recently sanctioned two major Russian oil producers and 183 vessels, primarily oil tankers that have transported Russian crude. Currently, these sanctioned tankers can still offload crude oil until March 12, 2024.

Between April and November 2024, India imported 88% of its oil needs, with about 40% of that coming from Russia, according to data from trade intelligence firm Kpler. Moreover, 75 of the sanctioned tankers have previously transported oil to India, with these vessels collectively delivering around 687 million barrels of crude oil in the past year, of which 30% was destined for Indian refineries.

BNP Paribas’ senior commodities strategist, Aldo Spanier, noted that the impact of these sanctions would be most acutely felt by Indian refiners. He pointed out that the U.S. sanctions have a broader reach than what the market initially anticipated, leading to expected disruptions in oil supply to India.

India’s Rising Oil Consumption

These sanctions come at a crucial time as India is projected to surpass China as the leading oil consumer by 2025, contributing to 25% of the global growth in oil consumption. The demand for transportation and cooking fuels is predicted to drive an increase of 330,000 barrels per day in 2024, according to forecasts from the U.S. Energy Information Administration (EIA). In 2023, India's oil consumption was at 5.3 million barrels per day, with an increase of 220,000 barrels per day noted last year.

Historically, India wasn't as reliant on Russian oil; in 2021, Russian crude comprised only 12% of India's total oil imports, a figure that has since climbed to 37.6% by 2024. The war in Ukraine spurred this increase as Western nations imposed sanctions on Russia, leading to cheaper prices that allowed India to import more Russian oil when other buyers pulled back.

Russia’s Urals crude oil has been trading at a discount of around $12 per barrel compared to the global benchmark Brent. In 2024, it was approximately $4 cheaper than oil from Iraq, one of India’s key suppliers. A senior oil analyst at Kpler, Muyu Xu, warned that a full compliance with U.S. sanctions could see a significant drop in Russian oil shipments to India starting in February or March.

A senior analyst at Rystad Energy, Viktor Kurilov, estimated that supply disruptions could reach up to 500,000 barrels per day for India.

Searching for Alternatives

Industry experts believe while India may be able to find alternative oil suppliers in the Middle East, it may take weeks or even months. Moreover, the prices of these alternative supplies are unlikely to be as favorable as the previously cheap Russian crude. Following the announcement of sanctions, global crude prices have surged, with Brent oil recently hitting a five-month high of around $80 per barrel after a period of reduced demand.

According to Kpler, oil prices from the Middle East are also on the rise. Xu remarked that if Russia can resolve its logistical issues swiftly, and if India and China cooperate adequately with the sanctions, oil prices may experience a temporary spike.

Furthermore, with the upcoming U.S. election bringing potential new sanctions on Iranian oil, the situation could become more complicated. Iran contributed to about 4% of the world’s oil production in 2023, and RBC Capital Markets' global head of commodity strategy, Helima Croft, indicated that new sanctions might further strain India’s oil supply.

Economic Implications for India

The Indian economy is particularly sensitive to oil price fluctuations. A research paper from 2023 highlighted that retail gasoline and diesel prices in India tend to rise sharply with increasing crude oil costs. The Reserve Bank of India stated that a $10 increase in oil prices could lead to a 0.4% rise in overall inflation.

Dhiraj Nim, an economist at ANZ, commented that high oil prices may reduce consumers' purchasing power, especially amid slowed income and GDP growth. On the flip side, if companies hesitate to pass on the costs to consumers due to reduced demand, it could negatively impact their profits. Should the government absorb these costs, it may face fiscal strain as well.

China and India will not only deal with the rising costs of the oil they consume, but they will also face increased shipping costs due to rising oil tanker rates. Andy Lipow, president of Lipow Oil Associates, pointed out that the stronger U.S. dollar combined with a weaker Indian rupee will exacerbate the economic effects in India.

The Indian rupee has faced significant pressure, falling to record lows due to a robust U.S. dollar and selling by foreign investors. Historically, India has experienced public outcry over high fuel prices. In 2018, protests erupted across the nation in response to soaring petrol and diesel prices, leading to the closure of businesses and schools in various regions.

India, Oil, Russia